John Mauldin Discusses What Could Go Wrong

This article was first published by me on Talkmarkets:

John Mauldin published an article regarding the economics of Donald Trump. I share many of his views. I think the article deserves to be discussed further.

It isn't as if John Mauldin is happy with the continual drive toward negative yields and the new normal. I believe he is like many, willing to fight for higher interest rates within reason and within the economic boundaries that exist. He is on board with the Fed, unlike other central banks, and is willing to risk recession to avoid negative rates:

Meanwhile, the Fed is in the middle of a long-overdue policy turn. There’s still a risk that they will find they started tightening just in time for a recession, which is also long overdue. I was convinced last summer that they would push rates negative in that scenario. Negative rates could yet happen, but I think they will be less likely if the FOMC abides by their dot plots and raises rates three times this year. And I find it difficult to believe that a Trump-appointed Fed would take us into negative rates. We are going to have to find more creative ways to do things.   

Mauldin speaks about tax reform. He believes taxes should be simplified. But he also believes that taxes should be lowered for the poor and middle classes. It appears that this aspect of tax reform will not occur. Trump has similar views to Mitt Romney. He believes people should pay taxes and he believes poor and middle classes must have tax burdens decreased or his plan for stimulating the economy will not work. Mauldin spoke of a possible VAT tax eliminating the social security tax, and goes into some detail. But regarding the total tax burden on those lower and middle classes, Mauldin said:

While the tax outcome could be nice for some of us, I’m afraid of the political perception problem if the first tax cuts go mainly to high-income taxpayers. Democrats will cry foul and try to force a split between the GOP’s business wing and its new populist elements. More to the point, a tax cut for the wealthy won’t stimulate the economy enough.
Steve Mnuchin has spoken about tax breaks for the middle classes, but apparently those are limited and may be limited to tax breaks on child care.

On top of taxation issues, Mauldin is worried about tariffs on retail items that would work as another tax upon the very people who need more stimulus to spend, not less! In addition, he said this about taxes on raw materials:

You have to be very careful about applying tariffs to raw commodities that we need as inputs to our own manufacturing but that we can’t produce in sufficient quantities here at home. We don’t want our manufacturers to be hamstrung because we load them up with increased costs for their input materials, like iron ore, heavy crude, or rare earths.
 On energy policy, there is an inherent conflict that John Mauldin has with himself. This is the one big disagreement with him. Mauldin says that the threat of tariffs should be extended to OPEC on oil production. That tariff would also be a tax on the very people who need to be offered stimulus rather than more tax.

Be that as it may, I agree with Mauldin on stimulus, that toll roads (another tax) and tax incentives for private industry to do fiscal projects will be small, and not at all like the big plans Trump has spoken about. Those big plans of Donald Trump may be dead in congress anyway if we listen to Mitch McConnell. The numbers go something like this as reported by author James Capretta:

The Congressional Budget Office (CBO) projects that the federal government will run accumulative deficit of $8.6 trillion over the period 2017 to 2026, assuming current law remains in effect. In addition to a $4 or $5 trillion tax cut, Trump wants to increase defense spending by about $450 billion over a decade. Without other changes, the Trump budget would push federal deficits up to around $13 trillion over ten years, or more than $1 trillion per year...
Trump says rapid growth and cuts in the rest of the budget will prevent the fiscal crisis that might otherwise result from his tax cut and increases in military spending. He proposes to cut spending on non-defense, non-entitlement programs and agencies — that is, many small domestic accounts funded through the annual appropriations process — by 1 percent each year, for ten years, thus saving $1 trillion over ten years.
The plan appears to be totally unrealistic, partly because the people who would spend will be taxed at a greater rate through tariffs and through not getting tax breaks that the wealthy would get. The plan is simply a status quo plan. Capretta goes on to say:

With respect to the federal budget, Trump would not shake up the status quo. He would cement it. He wants to offer voters a tax cut, increase defense spending, and make no changes in their promised entitlement benefits. He says he can make it all work by finding large, painless cuts elsewhere in the budget. That’s been promised before, and it has never worked. It won’t work this time either.

Mauldin is also concerned, as I am, about the importers. They are under direct threat of a trade war. They must be careful about spending and probably will not expand their businesses as long as they know that tariffs could put them out of business.

On one other issue it is hard to agree with John Mauldin. That is on the issue of Larry Kudlow. Larry has strange views about inflation. It isn't just the issue that Kudlow has no Ph.d.. No, the issue is that he gets the fundamental understandings of inflation wrong.

Kudlow is more interested in politics although he started out as a junior economist at the Fed. This is based on an analysis but is also something I understood from years of watching him on CNBC. Glenn Hubbard warned George W. Bush to refrain from tariffs, but he did not take the advice. However, Bush did reverse himself when other nations threatened to put tariffs on the United States two years later. Trump may show pragmatism on that issue, but he hates nations who he perceives as taking advantage of the US. This is an emotional issue for him. He could do a lot of damage in this area.

Larry Kudlow may not be a choice who would give good advice to the president. He does not have the background Hubbard had. The job has nothing to do with Kudlow's expertise. Kudlow is a public policy advocate. The office of CEA gives economic advice, and impartial economic advice, although I am thinking that Trump trusts economists like he trusts CNN and the intelligence community.

But Kudlow could cost the nation dearly if he gives Donald Trump advice that is not grounded in the facts. Losing a job because the government miscalculate would become the biggest tax of all.

Clearly John Mauldin is concerned that money is not going to go into the hands of people who will spend it. Even if jobs are created, if many cannot pay the extra prices for goods produced in the US, those jobs will be fleeting, or perhaps even automated. Protectionism has not ended well in the past. Donald Trump may use it as a bargaining chip, rather than impose tariffs across the board. That is the best we can hope for.



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